In re Paramount Publix Corporation, 298.

• Decision Date: 07 June 1937
• Docket Number: No. 298.,298.
• Parties: In re PARAMOUNT PUBLIX CORPORATION.
• Court: U.S. Court of Appeals — Second Circuit

90 F.2d 441 (1937)

In re PARAMOUNT PUBLIX CORPORATION.

No. 298.

Circuit Court of Appeals, Second Circuit.

June 7, 1937.

Root, Clark, Buckner & Ballantine, of New York City (Cloyd Laporte, Samuel S. Isseks, and Rupert Warren, all of New York City, of counsel), for appellant.

Samuel Spring, of New York City (Joseph M. Proskauer, J. Alvin Van Bergh, and Eugene Eisenmann, all of New York City, of counsel), for appellee.

Before MANTON, L. HAND, and SWAN, Circuit Judges.

SWAN, Circuit Judge.

Under a written contract dated January 1, 1932, Sam Katz was employed by the debtor in an executive capacity for a term of three years. His duties were to be such as should be assigned to him from time to time by the board of directors or its executive committee and were to be of a dignity substantially equivalent to those he had performed under a prior contract; his compensation was to be a weekly cash salary of $2,500 and the option to purchase at stipulated prices a block of the debtor's stock at the end of each six months of service. Execution of the contract was authorized by the directors and ratified by the stockholders. The proof of claim filed by Katz alleged a wrongful discharge on October 28, 1932 (prior to the filing of the petition under section 77B, Bankr.Act, 11 U.S.C.A. § 207), and claimed damages in the amount of $265,498.18 with interest. The trustees of the debtor filed objections to the claim and brought on for hearing before a special master the objection based on section 60 of the New York Stock Corporation Law (Consol.Laws, c. 59). The special master upheld the objection and recommended that the claim be expunged, but the District Court sustained the claimant's exceptions to the special master's report and ruled that section 60 afforded no defense to the claim.

It is to be observed that the order of the District Court does not allow the claim; it is yet to be determined whether Katz was wrongfully discharged and, if so, in what amount he was damaged. The order is really like one overruling a demurrer to a claim. Hence it is not appealable as of right under section 25, as amended (11 U. S.C.A. § 48), but only by leave of this court under section 24b, as amended (11 U.S.C. A. § 47 (b). Such leave was obtained.

Section 60 of the New York Stock Corporation Law reads as follows:

"§ 60. Officers. The directors of a stock corporation may appoint or elect from their number a president, and may appoint or elect one or more vice-presidents, a secretary, a treasurer, and other officers, agents and employees, who shall respectively have such powers and perform such duties in the management of the property and affairs of the corporation, subject to the control of the directors, as may be prescribed by them or in the by-laws. The directors may require any such officer, agent or employee to give security for the faithful performance of his duties, and may remove him at pleasure."

The first sentence clearly embraces such an officer as the appellee, who served as managing head of the debtor's theater department; and the sole question is whether the last sentence exempts the corporation from liability for discharging him without cause during the term of his contract of employment. The appellant contends that the District Court erred in answering that question in the negative.

The consequences of accepting the opposite view are startling. It would mean that no New York stock corporation could make a binding contract of employment for a definite term; all officers, agents and employees would be dischargeable at will without liability on the part of the corporation and it would follow that any of them could leave at will without incurring liability on their part, no matter how essential their services might be to the interests of the corporation. The announcement of such a doctrine would certainly cause surprise and consternation to the business world, for the statute has stood on the books since 1890 without any court decision to that effect and it is common knowledge that many contracts of term employment have been made by New York corporations on the assumption of their validity. The appellant suggests that the contract might bind the corporate agent for the stated term, although the corporation were left free to discharge him at will. But, if one of the parties may perform or not in its discretion, we do not see how the other can be bound. See Topken, Loring & Schwartz, Inc., v. Schwartz, 249 N.Y. 206, 211, 163 N.E. 735, 66 A.L.R. 1179. It is suggested also that the section should be construed to apply only to executives who exercise managerial powers. Such a limitation seems scarcely justified. The reasonable way to read the language is that the directors may appoint the specifically named officers and "other officers, agents and employees," and that each "shall have such powers and perform such duties in the management of the property and affairs of the corporation" as the directors may see fit to assign or the by-laws prescribe. So we think the appellant's contention must really go to the extreme we have indicated. Unless forced to it by controlling New York decisions, we should hesitate to adopt a construction of the statute which would bring about results so contrary to the general business practice.

It must be conceded, however, that the appellant makes a strong argument for its contention. Section 24 of the National Banking Act (12 U.S.C.A. § 24, par. 5), which is verbally similar to section 60 of the New York Stock Corporation Law, has been uniformly construed as permitting the removal of bank officers without subjecting the corporation to liability, despite the existence of an employment contract for a definite term. Copeland v. Melrose Nat. Bank of New York, 229 App.Div. 311, 241 N.Y.S. 429, affirmed without opinion in 254 N.Y. 632, 173 N.E. 898; Westervelt v. Mohrenstecher, 76 F. 118, 34 L.R.A. 477 (C. C.A.8); Rankin v. Tygard, 198 F. 795 (C. C.A.8); Van Slyke v. Metropolitan Nat. Bank, 155 Minn. 319, 193 N.W. 470; First Nat. Bank of Colquitt v. Miller, 23 Ga.App. 441, 98 S.E. 402; First Nat. Bank of Brandon v. Briggs' Assignees, 69 Vt. 12, 37 A. 231, 37 L.R.A. 845, 60 Am.St.Rep. 922. Moreover, section 24 is derived from a provision in the original National Banking Act of 1863 (12 Stat. 668), which was taken verbatim from section 18 of the New York Banking Law of 1838 (Laws 1838, c. 260, § 18), and the federal statute in its original form was construed favorably to the present appellant's position in Taylor v. Hutton, 43 Barb.(N.Y.) 195, 197, 198, and Harrington v. First Nat. Bank, 1 Thomp. & C.(N.Y.) 361, 366. Section 18 of the Law of 1838 was carried forward into the Banking Law of 1882 (Laws 1882, c. 409, § 35) and was not repealed until 1892 (Laws 1892, c. 689, § 216), at which time the provisions of the New York Stock Corporation Law (including the predecessor of the present section 60) were applicable to state banks. In view of this legislative history and the judicial construction of the National Banking Act, the appellant makes a forceful presentation of its case. Furthermore, very similar statutes in West Virginia and Washington have been construed by the courts of those states to confer on directors the privilege of discharging officers having term employment contracts, without imposing on the corporation liability for breach of contract. Darrah v. Wheeling Ice & Storage Co., 50 W.Va. 417, 40 S.E. 373; Long v. United Savings & Annuity Co., 76 W.Va. 31, 84 S.E. 1053; State ex rel. Blackwood v. Brast, 98 W.Va. 596, 127 S.E. 507; Wright v. Warren Bros. Co., 204 F. 231 (C.C.A.4); Llewellyn v. Aberdeen Brewing Co., 65 Wash. 319, 118 P. 30, Ann. Cas.1913B, 667; Murray v. MacDougal & Southwick Co., 88 Wash. 358, 153 P. 317; Barager v. Arcadia Orchards Co., 91 Wash. 294, 157 P. 675.

Despite this array of authority we do not think we are constrained to give to section 60 the same construction as section 24 of the National Banking Act has received. No New York court has so construed section 60 or its predecessor provision, section 27 of the Stock Corporation Law of 1890. On the contrary, such authority as there is has taken the opposite view. In Abbott v. Stern Bros., 248 App.Div. 161, 288 N.Y.S. 394, it was expressly ruled that section 60 afforded no defense to an action for breach of a term contract of employment. Abbott, the plaintiff, was employed as general merchandise manager of the defendant corporation for a term of two years. Before expiration of the term he was discharged and sued for damages for unlawful dismissal. Among the defenses interposed was section 60. The trial court directed a verdict for the plaintiff, which the appellate court reversed because there was enough evidence of the plaintiff...